Merchants Bancorp: Form 10-Q for the period ended Mar 31, 2025

Management’s discussion and analysis of the financial condition at March 31, 2025 and results of operations for the three months ended March 31, 2025 and 2024, is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this Form 10-Q.

The words “the Company,” “we,” “our,” and “us” refer to Merchants Bancorp and its consolidated subsidiaries, unless we indicate otherwise.

Financial Highlights for the Three Months Ended March 31, 2025

• Net income of $58.2 million decreased $28.8 million compared to the three months ended March 31, 2024.
• Diluted earnings per share of $0.93 decreased 48% compared to the three months ended March 31, 2024.
• The $28.8 million decrease in net income compared to the three months ended March 31, 2024, reflecting market uncertainty that delayed origination closings and permanent loan conversions in a growing pipeline, which negatively impacted the recognition of gain on sale and net interest margin more than expected. The decrease in net income was primarily driven by a $17.2 million, or 42%, decrease in noninterest income, a $12.8 million, or 26%, increase in noninterest expense, a $4.9 million, or 4%, decrease in net interest income and a $3.0 million, or 63% increase in provision for credit losses. Of the $28.8 million decrease in net income, $19.3 million, or $0.34 per diluted common share, was attributable to changes in valuation adjustments.
• Tangible book value per common share of $34.90 increased 19% compared to $29.26 for the three months ended March 31, 2024. See Non-GAAP Financial Measures section at the end of Item 2.
• As of March 31, 2025, the Company had $4.7 billion in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window based on available collateral, compared to $4.3 billion at December 31, 2024.
• Total assets of $18.8 billion increased 5% compared to March 31, 2024, and were essentially unchanged from December 31, 2024.
• Loans receivable of $10.3 billion, net of allowance for credit losses on loans, decreased $346.8 million, or 3%, compared to March 31, 2024, and decreased $10.3 million compared to December 31, 2024.
• Core deposits of $10.7 billion increased $2.5 billion, or 30%, compared to March 31, 2024 and increased $1.3 billion, or 14%, compared to December 31, 2024. Core deposits now represent 86% of total deposits, reaching the highest level the Company has reported since March 2022.
• Brokered deposits of $1.7 billion decreased $4.0 billion, or 70%, compared to March 31, 2024 and decreased $815.7 million compared to December 31, 2024.
• As of March 31, 2025, approximately 95% of loans reprice within three months, which reduces the risk of market rate increases.
• Net interest margin was 2.89% compared to 3.14% for the three months ended March 31, 2024.
• Efficiency ratio was 42.27% compared to 29.13% for the three months ended March 31, 2024. See Non-GAAP Financial Measures section at the end of Item 2.
• The Company redeemed all outstanding shares of the Series B Preferred Stock for approximately $125.0 million on January 2, 2025, at the liquidation preference of $1,000 per share (equivalent to $25 per depositary share).
• The volume of warehouse loans funded during the three months ended March 31, 2025 amounted to $11.9 billion, an increase of $3.9 billion, or 49%, compared to the three months ended March 31, 2024. This compared to the 2% industry increase in single-family residential loan volumes for the three months ended March 31, 2025 compared to the same period in 2024, according to an estimate of industry volume by the Mortgage Bankers Association.
• The total volume of loans originated and acquired through our Multi-family business was $934.4 million, an increase of $37.7 million, or 4%, compared to $896.7 million for the three months ended March 31, 2024. Many of these loans are bridge loans housed in our Banking segment while borrowers await conversion to permanent financing. The volume of loans originated and acquired for sale in the secondary market was $411.2 million, an increase of $158.5 million, or 63%, compared to $252.7 million for the three months ended March 31, 2024.

Business Overview

We are a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate in multiple business segments, including Multi-family Mortgage Banking that offers multi-family housing and healthcare facility financing and servicing, as well as syndicated low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking, agricultural lending, SBA lending, and traditional community banking.

Our business consists of funding low risk, multi-family, residential, and SBA loans meeting underwriting standards of government programs under an originate to sell model, and retaining adjustable-rate loans as held for investment to reduce interest rate risk. The gain on sale of these loans and servicing fees contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, brokered deposits, and short-term borrowing. We believe that the combination of net interest income and noninterest income from the sale of low risk profile assets results in lower than industry charge-offs and a lower expense base, which serves to maximize net income and higher than industry shareholder return.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The estimates and judgments that management believes have the most effect on its reported financial position and results of operations are set forth within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since those reported for the year ended December 31, 2024.

Financial Condition

As of March 31, 2025, we had approximately $18.8 billion in total assets, $12.4 billion in deposits, and $2.2 billion in total shareholders’ equity. Total assets as of March 31, 2025 included $10.3 billion of loans receivable, net of ACL-Loans and $4.0 billion of loans held for sale. There were also $1.6 billion in securities classified as held to maturity. We had $961.2 million in securities available for sale, the majority of which were acquired from a warehouse customer, and others are match funded with related custodial deposits or required to collateralize our credit-linked notes. There are some restrictions on the types of securities we hold, particularly for those that are funded by certain multi-family custodial deposits where we set the cost of deposits based on the yield of the related security. Additionally, we had $521.3 million of cash and cash equivalents, $389.8 million of mortgage loans in process of securitization that represent pre-sold multi-family rental real estate loan originations in primarily Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities pending settlements that typically occur within 30 days, and other assets of $424.3 million, which primarily related to low-income housing tax credits. Servicing rights at March 31, 2025 were $189.7 million based on the fair value of the loan servicing, which primarily includes Ginnie Mae multi-family servicing rights with 10-year call protection.

Comparison of Financial Condition at March 31, 2025 and December 31, 2024

Total Assets. Total assets of $18.8 billion at March 31, 2025 remained essentially unchanged from December 31, 2024.

Cash and Cash Equivalents. Cash and cash equivalents of $521.3 million at March 31, 2025 increased $44.7 million, or 9%, compared to $476.6 million at December 31, 2024. Included in cash equivalents was $33.4 million in restricted cash associated with senior credit linked notes described in Note 1: Basis of Presentation and Note 10: Borrowings in the Company’s 2024 Annual Report on Form 10–K.

Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization of $389.8 million at March 31, 2025 decreased $38.4 million, or 9%, compared to $428.2 million at December 31, 2024. These represent loans that our banking subsidiary, Merchants Bank, has funded and are held in the loan portfolio pending settlement, as primarily Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities with a firm investor commitment to purchase the securities.

Securities Available for Sale. Securities available for sale of $961.2 million at March 31, 2025 decreased $18.9 million, or 2%, compared to $980.1 million at December 31, 2024. The decrease in securities available for sale was primarily due to $181.9 in calls, maturities, repayments, sales and other adjustments, partially offset by purchases of $163.0 million during the period.

Included in securities available for sale were $626.3 million and $635.9 million of investments for which a fair value option was elected at March 31, 2025 and December 31, 2024, respectively. Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the unaudited condensed consolidated balance sheets with changes in the fair value recognized in earnings as they occur.

As of March 31, 2025, AOCL of $0.1 million, related to securities available for sale remained essentially unchanged from December 31, 2024. The $0.1 million of AOCL as of March 31, 2025 represented less than 1% of total equity and 1% of total securities available for sale, reflecting our interest rate risk policy of short duration on assets and liabilities.

Securities Held to Maturity. Securities held to maturity of $1.6 billion at March 31, 2025 decreased $58.4 million, or 4%, compared to $1.7 billion at December 31, 2024. The decrease was due to calls, maturities and repayments of securities totaling $58.5 million during the period.

Loans Held for Sale. Loans held for sale of $4.0 billion at March 31, 2025 increased $211.9 million, or 6%, compared to $3.8 billion at December 31, 2024. The increase in loans held for sale was due primarily to an increase in warehouse participations, as we experienced higher volume. Loans held for sale are comprised primarily of single-family residential real estate loan participations that meet Fannie Mae, Freddie Mac, or Ginnie Mae eligibility. It also includes a growing contribution of multi-family loans that are expected to be sold or securitized within the next year.

Loans Receivable, Net. Loans receivable, net of ACL-Loans, of $10.3 billion at March 31, 2025, decreased $10.3 million compared to December 31, 2024. The decrease in net loans was comprised primarily of:

• a decrease of $24.2 million, or 1%, in multi-family financing loans, to $4.6 billion at March 31, 2025.
• an increase of $98.8 million, or 7%, in healthcare financing loans, to $1.6 billion at March 31, 2025, reflecting higher loan originations.
• a decrease of $57.5 million, or 4%, in commercial and commercial real estate loans, to $1.4 billion at March 31, 2025.
• a decrease of $37.8 million, or 3%, in mortgage warehouse repurchase agreements, to $1.4 billion at March 31, 2025, reflecting a 13% decrease in volume compared to the fourth quarter 2024.

As of March 31, 2025, approximately 95% of total loans reprice within three months, which reduces the risk of market rate fluctuations.

The Company is a nationwide lender, especially in our largest portfolios of multi-family and healthcare financing. The tables below provide loans receivable for these two portfolios, including the five highest geographic concentrations.

(Dollars in thousands)

(Dollars in thousands)

(1) No state included in the “Other states” group has an individual percentage more than the next highest concentration percentage for the specific portfolio of loans.

Merchants Bancorp

(Dollars in thousands)

(Dollars in thousands)

(1) No state included in the “Other states” group has an individual percentage more than the next highest concentration percentage for the specific portfolio of loans.

ACL-Loans. The ACL-Loans of $83.4 million at March 31, 2025 decreased $973,000, or 1%, compared to $84.4 million at December 31, 2024. The decrease compared to December 31, 2024 was driven by $10.5 million in charge-offs that were partially offset by a $9.5 million increase in provision expense on loans, primarily related to the multi-family portfolio.

The $83.4 million allowance for credit losses on loans as of March 31, 2025, compared to the net charge offs of $20.2 million over the last twelve months ended March 31, 2025, could absorb four years of losses, assuming the same loss levels as the last twelve months.

Goodwill. Goodwill of $8.0 million at March 31, 2025 was unchanged compared to December 31, 2024.

Servicing Rights. Servicing rights of $189.7 million at March 31, 2025 decreased compared to $189.9 million at December 31, 2024. During the three months ended March 31, 2025, paydowns of $2.8 million and a negative fair market value adjustment of $0.8 million were partially offset by originated or purchased servicing of $3.3 million. The $0.8 million negative fair market value adjustment reflected a positive adjustment of $0.4 million for multi-family and healthcare mortgages and a negative adjustment of $1.2 million for single-family mortgages and SBA loans during the three months ended March 31, 2025.

Servicing rights are recognized in connection with sales of loans when we retain servicing of the sold loans. The servicing rights are recorded and carried at fair value. The fair value decrease recorded during the three months ended March 31, 2025 was driven by lower interest rates that impacted fair market value adjustments. The value of servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments due to expected prepayments and earnings rates on escrow deposits.

Other Assets and Receivables. Other assets and receivables of $424.3 million at March 31, 2025 decreased by $147.0 million, or 26%, compared to $571.3 million at December 31, 2024. The decrease was primarily due to a $125.0 million prepaid asset at December 31, 2024 that was utilized for the January 2, 2025 redemption of Series B Preferred Stock.

Deposits. Deposits of $12.4 billion at March 31, 2025 increased $486.2 million, or 4%, compared to $11.9 billion at December 31, 2024. The increase was primarily due to a $1.2 billion increase in core demand deposit accounts, partially offset by a decrease of $815.2 million in brokered certificate of deposits.

Total demand deposits increased by $1.2 billion, total savings deposits by $175.6 million, partially offset by an decrease in total certificates of deposit of $876.3 million. As of March 31, 2025, approximately 80% of the total deposits reprice within three months.

Core deposits, which are comprised of non-brokered deposits. increased by $1.3 billion, or 14%, to $10.7 billion at March 31, 2025 compared to $9.4 billion at December 31, 2024. Core deposits represented 86% of total deposits at March 31, 2025 compared to 79% of total deposits at December 31, 2024.

We have decreased our use of total brokered deposits by $815.7 million, or 32%, to $1.7 billion at March 31, 2025 compared to $2.5 billion at December 31, 2024. Brokered deposits represented 14% of total deposits at March 31, 2025, compared to 21% of total deposits at December 31, 2024. As of March 31, 2025, brokered certificates of deposit had a weighted average remaining duration of 67 days.

• Brokered certificates of deposit accounts decreased $815.2 million, or 32%, to $1.7 billion at March 31, 2025 compared to December 31, 2024.

Interest-bearing deposits at March 31, 2025 increased $411.9 million, or 4%, to $12.1 billion compared to December 31, 2024, and noninterest-bearing deposits increased $74.3 million, or 31%, to $313.3 million at March 31, 2025 compared to December 31, 2024.

Uninsured deposits totaled approximately $3.0 billion as of March 31, 2025, representing 24% of total Bank deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.5 billion and $1.6 billion as of March 31, 2025 and December 31, 2024, respectively.

Borrowings. Borrowings of $4.0 billion at March 31, 2025 decreased $384.4 million, or 9%, compared to $4.4 billion at December 31, 2024. The decrease was primarily due to an decrease of $324.0 million in FHLB advances and a decrease of $50.0 million in the usage of the Federal Reserve’s discount window. The Company primarily utilizes borrowing facilities from the FHLB, the Federal Reserve’s discount window, and AFX, using the most cost-effective options available. See Note 10: Borrowings for further information.

The Company continues to have significant borrowing capacity based on available collateral. As of March 31, 2025, unused lines of credit totaled $4.7 billion, compared to $4.3 billion at December 31, 2024. The Company’s ratio of total collateralized borrowing capacity to total assets remained at 46% from December 31, 2024 compared to March 31, 2025.

Other Liabilities. Other liabilities of $193.4 million at March 31, 2025 decreased $37.6 million, or 16%, compared to $231.0 million at December 31, 2024. The decrease in other liabilities was primarily in accrued expenses and unfunded commitments for low-income housing credit investments.

Total Shareholders’ Equity. Total shareholders’ equity was $2.2 billion as of March 31, 2025. The $82.6 million decrease compared to December 31, 2024 resulted primarily from the redemption of 6% Series B Preferred Stock for $125.0 million and dividends paid on common and preferred shares of $14.9 million during the period, which were partially offset by net income of $58.2 million. See Note 14: Preferred Stock for more details on the Series B redemption.

Asset Quality

Although there has been an increase in adversely classified loans, asset values remain strong overall and loans are well-collateralized. Loans are underwritten to strict agency guidelines. We continually strive to strengthen our various levels of credit and risk management.

Total nonperforming loans (nonaccrual and greater than 90 days past due but still accruing) were $284.6 million, or 2.73% of total loans receivable, at March 31, 2025, compared to $279.7 million, or 2.68%, of total loans at December 31, 2024 and $131.8 million, or 1.22%, at March 31, 2024. The increase in non-performing loans compared to March 31, 2024 was primarily driven by multi-family and healthcare customers with delinquent payments on variable- rate loans that have required higher payments, as well as the financial deterioration of a few sponsors. The higher payments are associated with the floating nature of the loan terms, which resulted in elevated interest rates relative to when the loans were originated. The increase compared to December 31, 2024 was primarily due to one multi-family customer. Delinquency levels on total loans as of March 31, 2025 have modestly increased by $10.1 million, to $334.7 million, compared to December 31, 2024. After six months of consecutive loan performance, the loans can be placed back on accrual status.

As a percentage of nonperforming loans, the ACL-Loans was 29% at March 31, 2025 compared to 30% at December 31, 2024 and 57% at March 31, 2024. The changes compared to both periods were primarily due to an increase in nonperforming loans, substantially all of which have been individually evaluated for impairment.

The Company has been making additional efforts to reduce its credit risk through loan sale and securitization activities since 2019. In April of 2023, as well as March and December of 2024, the Company strategically executed credit protection arrangements through a credit linked note and credit default swaps, totaling $2.9 billion in loans on the closing date, to reduce risk of losses, with incremental coverage ranging from 13-14% of the unpaid principal balances for each arrangement. These loans have credit protection and also have an allowance for credit losses. As of March 31, 2025, the balance of loans subject to credit protection arrangements was $2.2 billion, compared to $2.3 billion as of December 31, 2024. For additional information see Note 11: Derivative Financial Instruments and the Company’s 2024 Annual Report on Form 10–K.

Total loans receivable greater than 30 days past due were $304.6 million at March 31, 2025, $292.3 million at December 31, 2024, and $188.7 million at March 31, 2024. The increase in delinquent loans compared to both periods was primarily driven by multi-family customers with delinquent payments on variable-rate loans that have required higher payments due to interest rates remaining at elevated levels.

Loans receivable classified as Special Mention totaled $407.9 million at March 31, 2025, compared to $380.0 million at December 31, 2024 and $232.1 million at March 31, 2024. The increase compared to both periods was primarily due to higher interest rates that negatively impact our borrowers’ ability to make higher required payments.

Loans receivable classified as Substandard totaled $323.6 million at March 31, 2025, compared to $317.3 million at December 31, 2024 and $123.1 million at March 31, 2024. The increase compared to both periods was primarily due to higher interest rates that negatively impact our borrowers’ ability to make higher required payments. All substandard loans as of March 31, 2025 have been evaluated for impairment and these loans have specific reserves of $20.9 million.

During the three months ended March 31, 2025, there were $10.5 million of charge offs primarily related to five customers in the multi-family portfolio, and $28,000 of recoveries, compared to $925,000 of charge-offs related to one customer and $1,000 of recoveries for the three months ended March 31, 2024.

The percentage of commercial real estate loans as a percentage of total Tier I risk-based capital, including the ACL-Loans, has relatively unchanged from 348% to 353% from December 31, 2024 to March 31, 2025, respectively.

Comparison of Operating Results for the Three Months Ended March 31, 2025 and 2024

General. Net income of $58.2 million for the three months ended March 31, 2025 decreased by $28.8 million, or 33%, compared with the three months ended March 31, 2024, reflecting market uncertainty that delayed origination closings and permanent loan conversions in a growing pipeline, which negatively impacted the recognition of gain on sale and net interest margin more than expected. The decrease in net income was primarily driven by a $17.2 million, or 42%, decrease in noninterest income, a $12.8 million, or 26%, increase in noninterest expense, a $4.9 million, or 4%, decrease in net interest income, and a $3.0 million, or 63%, increase in provision for credit losses on loans, which was partially offset by a $9.0 million, or 33%, decrease in provision for income tax. Of the $28.8 million decrease in net income, $19.3 million, or $0.34 per diluted common share, was attributable to changes in valuation adjustments.

Noninterest income included a $754,000 negative fair market value adjustment to servicing rights and a $2.3 million negative fair market value adjustment to derivatives, which compared to positive fair market value adjustments of $14.0 million to servicing rights and $2.3 million to derivatives for the three months ended March 31, 2024.

Net Interest Income. Net interest income of $122.2 million for the three months ended March 31, 2025 decreased $4.9 million, or 4%, compared with $127.1 million for the three months ended March 31, 2024. The decrease reflected lower interest income and higher interest expense on borrowings, which were partially offset by lower interest expense for deposits.

The interest rate spread of 2.38% for the three months ended March 31, 2025 decreased 20 basis points compared to 2.58% for the three months ended March 31, 2024. Our net interest margin decreased 25 basis points, to 2.89%, for the three months ended March 31, 2025 compared to 3.14% for the three months ended March 31, 2024. The margin was negatively impacted by a significant shift in business mix, as lower-margin loans held for sale balances, consisting of primarily warehouse loans, grew by $480.3 million, or 14%, and warehouse repurchase agreements grew by $265.3 million, or 23%, while higher-margin loans receivable balances contracted by $339.1 million, or 3%.

Interest Income. Interest income of $287.2 million for the three months ended March 31, 2025, decreased $27.0 million, or 9%, compared with $314.2 million for the three months ended March 31, 2024. This decrease reflected lower average yield on loans and loans held for sale, partially offset by a higher average balance on securities held to maturity.

Interest income of $239.3 million on loans and loans held for sale for the three months ended March 31, 2025, decreased $32.7 million, or 12%, compared to the three months ended March 31, 2024. The average loan balance of $13.8 billion for the three months ended March 31, 2025, increased $256.2 million, or 2%, compared to $13.5 billion for the three months ended March 31, 2024. The average yield on loans decreased 105 basis points to 7.06%, for the three months ended March 31, 2025, compared to 8.11% for the three months ended March 31, 2024.

Interest income of $12.4 million on securities available for sale for the three months ended March 31, 2025, decreased $2.0 million, or 14%, compared to the three months ended March 31, 2024. The average balance of $961.1 million decreased $124.0 million, or 11%, compared to $1.1 billion for the three months ended March 31, 2024. The average yield decreased 12 basis points to 5.21%, for the three months ended March 31, 2025, compared to 5.33% for the three months ended March 31, 2024. The decrease in average balance of securities available for sale was primarily due to maturities and repayments, as well as fair value adjustments that were partially offset by purchases.

Interest income of $24.4 million on securities held to maturity for the three months ended March 31, 2025, increased $3.8 million, or 19%, compared to the three months ended March 31, 2024. The average balance of $1.6 billion increased $447.1 million, or 37%, compared to $1.2 billion for the three months ended March 31, 2024. The average yield decreased 89 basis points to 6.01% for the three months ended March 31, 2025, compared to 6.90% for the three months ended March 31, 2024. The increase in average balance was primarily due to purchases of senior investment securities backed by residential and healthcare loans retained as part of credit risk transfer securitization transactions originated by the Company.

Interest income of $3.7 million on mortgage loans in process of securitization for the three months ended March 31, 2025, increased $2.0 million, or 118%, compared to the three months ended March 31, 2024. The average balance of $277.4 million increased $139.5 million, or 101%, compared to $137.9 million for the three months ended March 31, 2024. The average yield increased 45 basis points, to 5.47% for the three months ended March 31, 2025, compared to 5.02% for the for the three months ended March 31, 2024. The increase in average balance was primarily due to a higher origination volume of loans pending settlement for sale on the secondary market.

Interest Expense. Total interest expense of $165.0 million for the three months ended March 31, 2025, decreased $22.1 million, or 12%, compared with $187.1 million for the three months ended March 31, 2024. The decrease reflected a lower average balance at a lower average rate on certificates of deposit that were partially offset by a higher average balance at a lower average rate on borrowings.

Interest expense on deposits of $123.9 million decreased $47.1 million, or 28%, for the three months ended March 31, 2025, compared to $171.0 million for the three months ended March 31, 2024. The decrease primarily reflected a lower average balance at a lower rate on certificates of deposit and a lower rate on interest-bearing checking accounts.

Interest expense of $38.8 million on certificate of deposit accounts for the three months ended March 31, 2025, decreased $37.7 million, or 49%, compared to $76.5 million for the three months ended March 31, 2024. The average balance of $3.4 billion for the three months ended March 31, 2025, decreased $2.3 million, or 41%, compared to the three months ended March 31, 2024. The average interest rate decreased 73 basis points to 4.67% for the three months ended March 31, 2025, compared to 5.40% for the three months ended March 31, 2024.

Interest expense of $50.6 million on interest-bearing checking accounts for the three months ended March 31, 2025, decreased $10.1 million, or 17%, compared to the three months ended March 31, 2024. The average balance of $5.1 billion for the three months ended March 31, 2025, increased $51.0 million, or 1%, compared to the three months ended March 31, 2024. The average interest rate decreased 80 basis points, to 4.01% for the three months ended March 31, 2025, compared to 4.81% for the three months ended March 31, 2024.

Interest expense on borrowings of $41.1 million for the three months ended March 31, 2025, increased $25.0 million, or 155%, compared to $16.1 million the three months ended March 31, 2024. The increase was due primarily to a $2.4 billion, or 336%, increase in average borrowings to $3.1 billion at March 31, 2025, compared to $716.9 million for the three months ended March 31, 2024. The average interest rate decreased 370 basis points to 5.33% for the three months ended March 31, 2025, compared to 9.03% for the three months ended March 31, 2024.

Included in interest expense on borrowings, our warehouse structured financing agreements provide for an additional interest payment for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 5.08% and 8.50%, to an effective rate of 5.33% and 9.03% for the three months ended March 31, 2025 and 2024, respectively.

The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.

(Dollars in thousands)

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Yields have been calculated on a pre-tax basis.

The following table summarizes the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates:

(In thousands)

Provision for Credit Losses. We recorded a provision for credit losses of $7.7 million for the three months ended March 31, 2025, an increase of $3.0 million, or 63%, over the three months ended March 31, 2024.

The $7.7 million provision for credit losses consisted of $9.5 million for the ACL-Loans and a negative provision of $1.8 million for the ACL-OBCE’s.

The ACL-Loans was $83.4 million, or 0.80% of total loans, at March 31, 2025, compared to $84.4 million, or 0.81% of total loans, at December 31, 2024, and $75.7 million, or 0.70%, at March 31, 2024. The $7.7 million increase compared to March 31, 2024 was primarily related to loans in the multi-family portfolio, which were partially offset by charge-offs. The decrease compared to December 31, 2024 was driven by a $9.5 million increase in provision expense, primarily related to the multi-family portfolio, which was offset by $10.5 million in charge-offs. Additional details are provided in the ACL-Loans portion of the Comparison of Financial Condition at March 31, 2025 and December 31, 2024 and in Note 4: Loans and Allowance for Credit Losses on Loans.

Noninterest Income. Noninterest income of $23.7 million for the three months ended March 31, 2025 decreased $17.2 million, or 42%, compared to $40.9 million for the three months ended March 31, 2024. The decrease was primarily due to a $15.4 million, or 79%, decrease in loan servicing fees, a $2.8 million, or 47%, decrease in other income, and a $1.9 million, or 36%, decrease in syndication and asset management fees, which was partially offset by a $2.3 million, or 24%, increase in gain on sale of loans.

Loan servicing fees included a $0.8 million negative fair market value adjustment to servicing rights for the three months ended March 31, 2025, compared to a $14.0 million positive fair market value adjustment to servicing rights for the three months ended March 31, 2024.

Other noninterest income of $3.2 million for the three months ended March 31, 2025 decreased $2.8 million, or 47%, compared to $5.9 million for the three months ended March 31, 2024. Other noninterest income included a $2.3 million negative adjustment to the fair value of floor derivatives for the three months ended March 31, 2025 compared to a $2.3 million positive fair value adjustment for the three months ended March 31, 2024. The floor derivatives are associated with arrangements whereby there is a guaranteed minimum interest rate the Company will receive on certain assets bearing variable interest rates. The change in value was driven largely by the change in market interest rates during the period. Also included in other noninterest income were changes in fair value on certain securities available for sale that the Company elected to account for under the fair value option, with changes in fair value reflected in earnings. The Company also has put options associated with these securities that provide protection against any change in value. By design, the fair value adjustments of the securities and the put options should be substantially equal and offsetting. For the three months ended March 31, 2025 there was a $6.2 million positive fair value adjustment on the securities that were offset by a $6.2 million negative fair value adjustment on the put options, hence having no net gain or loss recognized. Also see Note 2: Investment Securities, Note 11: Derivative Financial Instruments, and Note 12: Disclosures about Fair Value of Assets and Liabilities.

Syndication and asset management fees of $3.4 million for the three months ended March 31, 2025, decreased $1.9 million, or 36%, compared to $5.3 million for the three months ended March 31, 2024. The decrease was attributable to less equity raised by our LIHTC syndication platform during the three months ended March 31, 2025 than the prior year.

The $2.3 million, or 24%, increase in gain on sale of loans resulted from higher volume in the multi-family loan portfolio.

A summary of the gain on sale of loans for the three months ended March 31, 2025 and 2024 is below:

(In thousands)

Noninterest Expense. Noninterest expense of $61.7 million for the three months ended March 31, 2025 increased $12.8 million, or 26%, compared to $48.9 million for the three months ended March 31, 2024. The increase was due primarily to a $6.8 million, or 23%, increase in salaries and employee benefits to support business growth, including $2.5 million associated with the addition of production staff, which is expected to elevate production, gain on sale, and expenses in future quarters as well. Also contributing to the higher expenses, was a $3.9 million increase in credit risk transfer premium expense associated with ongoing credit default swaps that were executed in March and December 2024, as well as a $2.1 million, or 41%, increase in deposit insurance expense, reflecting an increase in underperforming assets, coupled with an increase in total assets.

The efficiency ratio was at 42.27% in the three months ended March 31, 2025, compared with 29.13% in the three months ended March 31, 2024. The $3.9 million in premium expense associated with credit default swaps executed in March and December 2024 had a negative 265 basis point impact on the efficiency ratio in the current quarter. See Non-GAAP Financial Measures section at the end of Item 2.

Income Taxes. Income tax expense decreased $9.0 million, or 33%, to $18.3 million for the three months ended March 31, 2025 from the three months ended March 31, 2024. The decrease was due primarily to a 33% decrease in pretax income period to period. The effective tax rate was 23.9% and 23.8% for the three months ended March 31, 2025 and March 31, 2024, respectively.

Our Segments

We operate in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable segments are consistent with the internal reporting and evaluation of the principal lines of business of the Company.

The Multi-family Mortgage Banking segment originates and services government sponsored mortgages for multi-family and healthcare facilities through Merchants Capital. Merchants Capital is also a fully integrated syndicator of low-income housing tax credit and debt funds. As one of the top ranked agency affordable lenders in the nation, our licenses with Fannie Mae, Freddie Mac, and FHA, coupled with our bank financing products, provide sponsors with custom beginning-to-end financing solutions that adapt to an ever-changing market. We are also one of the largest Ginnie Mae servicers in the country based on aggregate loan principal value. As of March 31, 2025 the Company’s total servicing portfolio had an unpaid principal balance of $30.0 billion, primarily managed in the Multi-Family Mortgage Banking segment. Included in this amount was an unpaid principal balance of loans serviced for others of $17.9 billion, an unpaid principal balance of loans sub-serviced for others of $3.6 billion, and other servicing balances of $0.8 billion at March 31, 2025. These loans are not included in the accompanying balance sheets. The Company also manages $7.7 billion of loans for customers that have loans on the balance sheet at March 31, 2025. The servicing portfolio primarily consists of Ginnie Mae, Fannie Mae, and Freddie Mac loans and is a significant source of our noninterest income and deposits.

Our Mortgage Warehousing segment funds agency eligible loans for non-depository financial institutions from the date of origination or purchase until the date of sale to an investor, which typically takes less than 30 days and is a significant source of our net interest income, loans, and deposits. Mortgage Warehousing has grown to fund over $33.0 billion in 2023, $45.6 billion in 2024, and $11.9 billion for the three months ended March 31, 2025. Mortgage Warehousing also provides commercial loans and collects deposits related to the mortgage escrow accounts of its customers.

The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in Indiana, except for correspondent mortgage banking which, like Multi-family Mortgage Banking and Mortgage Warehousing, is a national business. The Banking segment has a well-diversified customer and borrower base and has experienced significant growth over the past three years.

Our segment financial information was compiled utilizing the policies described in Note 17: Segment Information, included elsewhere in this report. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes, if any, in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Transactions between segments consist primarily of borrowed funds and overhead expense sharing. Intersegment interest expense is allocated to the Mortgage Warehousing and Banking segments based on Merchants Bank’s cost of funds. The provision for credit losses is allocated based on information included in our ACL-Loans analysis and specific loan data for each segment.

Our segments diversify the net income of Merchants Bank and provide synergies across the segments. Strategic opportunities come from MCC and MCS, where loans are funded by the Banking segment and the Banking segment provides Ginnie Mae custodial services to MCC and MCS. Low-income tax credit syndication and debt fund offerings complement the lending activities of new and existing multi-family mortgage customers. The securities available for sale and held to maturity funded by MCC custodial deposits or purchases of securitized loans originated by MCC are pledged to FHLB to provide advance capacity during periods of high residential loan volume for Mortgage Warehousing. Mortgage Warehousing provides leads to Correspondent Lending in the Banking segment. Retail and commercial customers provide cross selling opportunities within the Banking segment. Merchants Mortgage is a risk mitigant to Mortgage Warehousing because it provides us with a ready platform to sell the underlying collateral to secure repayment. These and other synergies form a part of our strategic plan.

The Other segment presented below, in Note 17: Segment Information, and elsewhere in this report includes general and administrative expenses for provision of services to all segments, internal funds transfer pricing offsets resulting from allocations to or from the other segments, certain elimination entries, and investments in low-income housing tax credit limited partnerships or LLC.

For the three months ended March 31, 2025 and 2024, we had total net income of $58.2 million and $87.1 million, respectively. Net income for our three segments for the respective periods was as follows:

(In thousands)

Multi-family Mortgage Banking. The Multi-family Mortgage Banking segment reported net income of $3.4 million for the three months ended March 31, 2025, a decrease of $13.2 million, or 79%, compared to net income of $16.6 million for the three months ended March 31, 2024. The decrease in net income was primarily due to a $12.5 million decrease in loan servicing fees, as well as a $5.0 million increase in noninterest expense that included $2.5 million associated with the addition of production staff, which is expected to elevate expenses in future quarters as well.

Loan servicing fees included positive fair market value adjustment of $0.4 million to servicing rights for the three months ended March 31, 2025, compared to a positive fair market value adjustment of $13.2 million for the three months ended March 31, 2024.

The total volume of loans originated and acquired through our Multi-family business was $934.4 million, an increase of $37.7 million, or 4%, compared to $896.7 million for the three months ended March 31, 2024. Many of these loans are bridge loans housed in our Banking segment while borrowers await conversion to permanent financing. The volume of loans originated and acquired for sale in the secondary market was $411.2 million, an increase of $158.5 million, or 63%, compared to $252.7 million for the three months ended March 31, 2024.

Mortgage Warehousing. The Mortgage Warehousing segment reported net income of $15.4 million for the three months ended March 31, 2025, a decrease of $4.8 million, or 24%, compared to $20.2 million for the three months ended March 31, 2024. The decrease in net income reflected a $4.1 million decrease in noninterest income.

Noninterest income included a $2.3 million negative fair market value adjustment to derivatives for the three months ended March 31, 2025, compared to a $2.3 million positive fair market value adjustment to derivatives for the three months ended March 31, 2024.

The volume of loans funded during the three months ended March 31, 2025 amounted to $11.9 billion, an increase of $3.9 billion, or 49%, compared to the three months ended March 31, 2024. This compared to the 2% industry increase in single-family residential loan volumes for the three months ended March 31, 2025 compared to the same period in 2024, according to an estimate of industry volume by the Mortgage Bankers Association.

Banking. The Banking segment reported net income of $47.1 million for the three months ended March 31, 2025, a decrease of $9.3 million, or 17%, compared to $56.4 million for the three months ended March 31, 2024. The decrease in net income was primarily due to lower net interest income from a decline in yields and higher interest expense on borrowings.

Noninterest income included a $1.2 million negative fair market value adjustment to servicing rights for the three months ended March 31, 2025, compared to a $0.8 million positive fair market value adjustment to servicing rights for the three months ended March 31, 2024.

Liquidity and Capital Resources

Liquidity.

Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, borrowings, brokered deposits, principal and interest payments on loans, interest on investment securities, and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition.

At March 31, 2025, based on collateral, we had $4.7 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. This compared to $4.3 billion at December 31, 2024. While the amounts available fluctuate daily, we also had available capacity lines through our membership in the AFX. This liquidity enhances the Company’s ability to effectively manage interest expense and asset levels in the future.

The Company’s most liquid assets are in cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together with its unused borrowing capacity of $4.7 billion described above, these totaled $11.0 billion, or 58%, of its $18.8 billion total assets at March 31, 2025. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our liquid assets and borrowing capacity significantly exceed our uninsured deposits. Uninsured deposits represent 24% of total Bank deposits. Our line of credit with the Federal Reserve Bank of Chicago, alone, could fund 107% of uninsured deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.5 billion and $1.6 billion as of March 31, 2025 and December 31, 2024, respectively.

The Company’s investment portfolio has minimal levels of unrealized losses and management does not anticipate a need to sell securities for liquidity purposes at a loss. As of March 31, 2025, AOCL of $0.1 million, related to securities available for sale decreased 42% compared to accumulated losses as of December 31, 2024. The $0.1 million of AOCL as of March 31, 2025 represented less than 1% of total equity and 1% of total securities available for sale.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $148.0 million and $(383.8) million for the three months ended March 31, 2025 and 2024, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities and loans, was $ (0.9) million and $ (695.0) million for the three months ended March 31, 2025 and 2024, respectively. Net cash (used in) provided by financing activities, which is comprised primarily of net change in borrowings and deposits was $ (102.4) million and $1.0 billion for the three months ended March 31, 2025 and 2024, respectively.

Certificates of deposit that are scheduled to mature in less than one year from March 31, 2025 totaled $3.0 billion, or 98% of total certificates of deposit. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may decide to utilize FHLB advances, the Federal Reserve discount window, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Off-Balance Sheet Arrangements.

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our unaudited condensed consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit.

At March 31, 2025, we had $4.4 billion in outstanding commitments to extend credit that are subject to credit risk and $3.7 billion outstanding commitments subject to certain performance criteria and cancellation by the Company, including loans pending closing, unfunded construction draws, and unfunded lines of warehouse credit. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Additionally, the Company’s business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.

Capital Resources.

The access to and cost of funding new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company has demonstrated its ability to raise capital or utilize securitization transactions to free up capital as needed.

The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to our current operations and to promote public confidence in our Company.

Shareholders’ Equity. Total shareholders’ equity was $2.2 billion as of March 31, 2025. The $82.6 million decrease compared to December 31, 2024 resulted primarily from the redemption of 6% Series B Preferred Stock for $125.0 million and dividends paid on common and preferred shares of $14.9 million during the period, which were partially offset by net income of $58.2 million. See Note 14: Preferred Stock for more details on the Series B redemption.

Preferred Stock/Dividends.

7% Series A Preferred Stock. The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 at a price equal to the liquidation preference of $25 per share, or $52.0 million, using cash on hand.

6% Series B Preferred Stock. The Company redeemed all outstanding shares of the Series B Preferred Stock on January 2, 2025, at a price equal to the liquidation preference of $1,000 per share (equivalent to $25 per depositary share), or $125.0 million. The $4.2 million expenses associated with the original issuance, which were capitalized in 2019, were recognized through retained earnings upon redemption, thus reducing net income available to common shareholders. Similarly, the redemption resulted in an excise tax of $1.2 million that will not be payable until 2025 taxes are due in 2026, and any future issuance of shares until one year after the redemption can offset the amount of excise tax that will be paid.

Cash to redeem the shares was delivered to the Company’s transfer agent on December 31, 2024, resulting in a prepaid asset reported in other assets. As of the redemption date the Series B Preferred Stock did not have any accrued, but unpaid dividends.

7.625% Series E Preferred Stock. On November 25, 2024, the Company issued 9,200,000 depositary shares, each representing a 1/40th interest in a share of its 7.625% Fixed Rate Reset Series E Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $230.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $7.3 million paid to third parties, the Company received total net proceeds of $222.7 million.

The Series E Preferred Stock have no voting rights with respect to matters that generally require the approval of our common shareholders. Dividends on the Series E Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series E Preferred Stock, in whole or in part, at its option, on any dividend payment date on or after January 1, 2030, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.

Dividends declared to preferred shareholders for the three months ended March 31, 2025, totaled $10.3 million. For more information, see Note 14: Preferred Stock.

Common Shares/Dividends. As of March 31, 2025, the Company had 45,881,706 common shares issued and outstanding. The Board declared a quarterly dividend of $0.10 per share for the first quarter of 2025.

Capital Adequacy.

The following tables present the Company’s capital ratios at March 31, 2025 and December 31, 2024:

(Dollars in thousands)

(1) As defined by regulatory agencies.

Merchants Bancorp

(Dollars in thousands)

(1) As defined by regulatory agencies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Merchants Bank to maintain minimum amounts and ratios (set forth in the table above). Management believes, as of March 31, 2025 and December 31, 2024, that the Company and Merchants Bank met all capital adequacy requirements to which they were subject. For additional information regarding dividend restrictions, see the Company’s 2024 Annual Report on Form 10–K.

As of March 31, 2025 and December 31, 2024, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s or Merchants Bank’s category.

FMBI was subject to these measures prior to the sale of its branches and the merger of its remaining charter into Merchants Bank in January 2024. As of December 31, 2023, FMBI met all capital adequacy requirements (as set forth in the table above). The FDIC categorized FMBI as well capitalized at that time and there are no conditions or events since that notification that management believes would have changed that category.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk related to market demand.

Interest Rate Risk

Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and

interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries or SOFR.

Our business consists of funding low risk, multi-family, residential, SBA loans, and warehouse repurchase agreements, meeting underwriting standards of government programs under an originate to sell model, and retaining adjustable-rate loans as held for investment to reduce interest rate risk.

Our Asset-Liability Committee, or ALCO, is a management committee that manages our interest rate risk within policy limits established by our board of directors. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO meets quarterly, at a minimum, to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits. Additionally, the Risk Committee of our Board meets quarterly, in conjunction with Board meetings, to assess risks associated with interest rate sensitivity.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives and excludes non-interest income. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results reflect the analysis used quarterly by management. It models gradual -200,

-100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period.

The following table presents NII at Risk for Merchants Bank as of March 31, 2025 and December 31, 2024.

Our interest rate risk management policy objective is to limit the change in our net interest income to 20% for a +/-100 basis point move in interest rates, and 30% for a +/-200 basis point move in rates. At March 31, 2025 we estimated that we were within policy limits set by our board of directors for the -200, -100, +100, and +200 basis point scenarios.

The EVE results for Merchants Bank included in the following table reflect the analysis used quarterly by management. It models immediate -200, -100, +100 and +200 basis point parallel shifts in market interest rates.

Our interest rate risk management policy objective is to limit the change in our EVE to 15% for a +/-100 basis point move in interest rates, and 20% for a +/-200 basis point move in rates. We are within policy limits set by our board of directors for the -200, -100, +100 and +200 basis point scenarios. The EVE reported at March 31, 2025 projects that as interest rates increase (decrease) immediately, the economic value of equity position will be expected to decrease (increase). When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

Non-GAAP Financial Measures

The Company’s accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist users of the financial information in assessing the Company’s operating performance. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the following table.

Although intended to enhance understanding of the Company’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance.

(Dollars in thousands)

(Dollars in thousands)

The information required under this item is included as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q under the headings “Liquidity and Capital Resources” and “Interest Rate Risk.”

(a) Evaluation of disclosure controls and procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2025, the Company’s disclosure controls and procedures were effective.

(b) Changes in internal control.

There have been no changes in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II

Other Information

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.